Archive for July 26th, 2012

On a busy Wednesday on the floor of Congress, the Senate Democrats and House Republicans engaged in a good ol’ fashion political pissing match, with only the 2013 tax bill of every American taxpayer at stake.

Firing the opening salvo in what is sure to be a long, fruitless battle to determine the fate of the Bush tax cuts, Senate Democrats passed legislation  (Senate bill 3412) that would extend the Bush tax cuts for those earning less than $250,000. Adding salt to the Republican wound, the Senate also voted against a Republican amendment to the plan that would have extended the Bush tax cuts for all taxpayers into 2013.

In response, House Republicans quickly put an end to any Senate celebration by refusing to consider the Senate bill, opting instead to proceed with plans to pass a bill next week  (H.R. 8, which we discussed earlier this week here) that would extend the Bush tax cuts for all taxpayers into 2013, while also keeping the estate tax at its current parameters and increasing the AMT exemption for 2012 and 2013. Of course, if President Obama is re-elected in November — and assuming he doesn’t drastically shift his long-held refusal to extend the Bush tax cuts for America’s wealthiest taxpayers — he will surely veto any bill that comes out of the House.

Call me a cynic, but I’ve got to believe that being in Congress must be a lot like running in deep water: you’re spending a lot of energy, but you’re not actually getting anywhere.

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Let’s say you never got around to filing your 2006 tax return. By 2010, the IRS is likely to get tired of your tax truancy, and may well file a substitute for return (SFR) on your behalf based on information filed with the IRS by third parties: W-2s, 1099s, and the like.

Now, it’s extremely possible the IRS will assess a tax higher than what might have resulted had you filed your own return. Why? Because the IRS will not make the effort to determine what your itemized deductions might have been in 2006. They’re simply going to add up your income, take the standard deduction, and be done with the calculation.

Is it fair? Probably. After all, it’s not the Service’s fault you got so caught up in sprucing up your Myspace page and rocking out to your 1st generation iPod that you failed to file your 2006 tax return. But is it the law? Sure is. The Tax Court has held many times — the most recent being yesterday in Murray v. Commissioner, T.C. Memo 2012-213 — that:

“A taxpayer must file a return to claim an itemized deduction. If a taxpayer does not file a tax return and, as a result, the Commissioner prepares an SFR, then the taxpayer may not claim itemized deductions.”

So be warned: Leave the tax prep to the IRS, and you’re giving up your right to claim itemized deductions.

In other news, Joe Kristan at Roth & Company has an update on the Oregon woman who filed a false tax return claiming a $5.1M tax refund, received it on a prepaid debit card from Turbo Tax, and went on a bit of a spending spree. Spoiler alert: she’s going to jail.

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